Retirees may need an alternative option to unlock liquidity and get through a financial double whammy
While retirees are often advised to maintain an emergency fund large enough to cover six to 12 months of living expenses, it may be worthwhile for them to consider an alternative option to fulfill sudden needs for liquidity.
“For retirees, financial setbacks, especially those due to health-related problems, are always a real and present danger,” said Robin Weinberger, director of national accounts and Peter Katz, co-director of national accounts with Life Insurance Settlements Inc.
In a piece published in ThinkAdvisor, the two highlighted that an unexpected financial need becomes especially problematic during a down market. They pointed to recent episodes of volatility in the stock market, as well as predictions of recession advanced by many analysts.
“Similarly, other investment markets like bonds and real estate can also be depressed at any moment in time,” they said.
The combination of a down market and a critical cash need could require retirees to liquidate part of their retirement nest egg. Doing that with traditional investment portfolio assets would cause them to lock in losses from downturns, putting their long-term financial security at risk.
To avoid such painful decisions, many retirement planners recommend that their clients keep an emergency fund invested in money-market accounts. But another option, according to Weinberger and Katz, is to explore a life settlement for life insurance policies that may have become unwanted, unneeded, or unaffordable.
“Life settlement values are, for the most part, uncorrelated to stock, bond and real estate markets,” they said, stressing the potential for retirees to avoid selling assets at depressed values.
They also noted that a life settlement fetches a greater amount than the cash surrender value for a given policy. They added that the transaction ends the future premium burden, providing additional relief from a cash-flow perspective.
“This is a good time to point out that it’s usually a good idea for your clients to have more than one life insurance policy,” the duo said. Insurers typically will not allow a single universal life policy with a US$2-million face amount to be split up, leaving policy holders to decide whether they’ll keep it all or sell it all. But with two life-insurance policies each worth US$1 million, they’ll have the flexibility to sell only a portion of their coverage.
“This added flexibility is potentially a big win for your clients,” they said.
